Wed 11/21/2018 09:35 AM
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Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion

Early this morning, LBI Media Inc. filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware with an RSA contemplating $38 million in senior secured, term loan DIP financing provided by HPS Investments. CFO Brian Kei disclosed in his first day declaration this morning that there has been no settlement to resolve the litigation with second lien noteholders in New York state court, despite the efforts of the debtors and HPS. In fact, say the debtors, when seeking to engage in restructuring negotiations with an hoc group of second lien noteholders regarding either in- or out-of-court restructuring options in October, “one of the primary members of the Junior Noteholder Group delivered a letter to the Debtors threatening even further legal action.”

The debtors propose in their confirmation timeline an “April/May 2019” effective date with a May 20, 2019, applicable milestone. A first day hearing date has not been posted on the docket, but the debtors request a Tuesday, Nov. 27, first day hearing and have set a Nov. 29 applicable milestone. Judge Christopher Sontchi has been added to the proceedings, and the docket for the cases is available HERE.

According to the CFO’s declaration, the contemplated plan provides for, among other things, HPS to exchange its first lien notes for a majority equity interest in the reorganized company, as well as providing recoveries for other classes of creditors supporting the restructuring, “including to the holders of second lien notes, ongoing trade claims, general unsecured claims, unsecured notes claims, and claims related to settlements with certain of the Debtors’ key suppliers of intellectual property” (emphasis added). The contemplated plan also provides, however, that the second lien noteholder group, also referred to as the junior noteholder group, “may obtain 100% of the equity interests in the reorganized Company to the extent it votes to accept the Plan and is willing to satisfy HPS’s claims under the DIP Facility and First Lien Notes in full, without the need to satisfy the make-whole obligation” (emphasis added).

As of the petition date, $233 million was outstanding under the first lien notes and $262 million outstanding under the second priority notes. Additionally, the debtors had $28 million and $7 million of outstanding unsecured intermediate holdco notes due 2022 and holdco notes due 2017, respectively.

The debtors have “significant flexibility” under the contemplated plan, allowing the debtors to either (i) seek out and consummate a superior proposal or (ii) “have their obligations under the first lien make-whole provision waived if the Junior Noteholder Group elects to refinance HPS’s claims.” The contemplated plan and RSA allow the debtors to run a marketing process for a period of up 75 days after the petition date. “Starting immediately,” the declaration says, “LBI and its advisors intend to solicit interest and bids from potential strategic and financial investors (including the Junior Noteholder Group) to sponsor an alternative value-maximizing restructuring transaction.”

In October, with $28 million of coupon payments coming due in November, the debtors sought to engage with principals and advisors to the debtors’ lenders, including those in the second lien noteholder group and HPS. The debtors also approached potential third-party investors to attempt to refinance the second lien debt, but Kei says that no third party expressed an interest and the second-lien noteholders opted not to engage with the debtors “or even enter into a confidentiality agreement with the Debtors to allow for constructive restructuring discussions.” Instead, Kei says, the group engaged in direct discussions with HPS regarding a potential settlement and dismissal of the state court litigation, and the debtors were “supportive of such negotiations as they believed a settlement was in the best interests of all stakeholders.” Unfortunately, they add, no agreement was reached prior to the petition date.

A group of second lien noteholder plaintiffs currently has pending declaratory judgment and fraudulent conveyance actions in the New York state court against the company and its CEO Lenard Liberman. HPS Investments is also named as a defendant in the fraudulent conveyance litigation. The noteholder plaintiffs’ litigation alleges that the company’s May 2018 refinancing transaction with HPS Investments was a “conspiracy” to transfer the equity of LBI, “an insolvent company worth hundreds of millions of dollars,” from the company’s pre-existing creditors to HPS and Liberman. The transaction refinanced $220 million of 10% first lien notes due 2019 into $233 million of first lien debt due 2022 (with a springing maturity to March 2020 if the second lien notes have not been repaid by that time). As amended through the transaction, the first lien indenture now includes approximately $87 million make whole premium. The plaintiffs asserted in their latest brief that LBI “devised a scheme to increase the amount of debt on its books” in order to ensure that HPS - characterized as “a hedge fund with whom LBI had secretly partnered” - would control any bankruptcy proceeding.

In his declaration, Kei says that after the transaction with HPS was closed, the debtors’ growth efforts continued to be “weakened” by the second lien noteholder group as it continued to litigate against the company, its founder and CEO, and HPS. Kei says that the group “commenced multiple lawsuits, and threatened several more, distracting management from operations,” hindering efforts to improve operations and risking “pushing LBI into a precipitous freefall bankruptcy.” Kei says that the debtors’ tightening liquidity was “exacerbated by the expense” of litigation, making it “substantially more difficult” for the company to meet its growth objectives, leading management to determine that a comprehensive restructuring was needed.

In July, the debtors appointed Neal Goldman as an independent board member and formed a committee of independent directors, subsequent to which several potential strategic deleveraging transactions were examined under advisement by Weil, Gotshal & Manges LLP and Guggenheim Securities LLC, according to the declaration. Kei says that “[d]espite the absence of a global settlement,” the company “focused on constructive restructuring discussions with HPS” rather than “continuing to waste resources in a litigation war of attrition.” The discussions with the fund resulted in LBI securing a commitment from HPS pursuant to the debtors’ restructuring support agreement dated Nov. 20, which is attached to Kei’s declaration. According to Kei, the RSA provides that LBI and HPS will support the joint plan of reorganization, which is included as an attachment to the RSA.

According to the debtors’ DIP financing motion, they seek authorization to obtain DIP financing under a multiple-draw super-priority senior secured term loan facility in an aggregate principal amount not to exceed $38 million, with HPS Investment Partners as DIP agent, and seek interim authority to draw up to $10 million under the facility. The DIP facility will bear interest at a rate of LIBOR + 9% per annum with default interest at 2.5% per annum. A summary of key terms and milestones is included in the financing motion, as well as the DIP credit agreement, a declaration from Ronen Bojmel of Guggenheim and a proposed DIP budget.

A breakdown of the debtors’ proposed plan confirmation schedule is below.
 

The debtors are represented by Weil Gotshal and Richards, Layton as attorneys, Guggenheim as investment banker, Alvarez & Marsal as financial advisor and Epiq as noticing and solicitation agent.
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